BEA Innovative Finance
BEA Innovative Finance was created as a division of Barry Edwards and Associates (BEA) when new ideas were being formulated to make project financing more accessible for companies that did not have the means to provide substantial equity or guarantees to obtain bank financing. Initially a new approach to try to attract funding for an Ethanol plant to be built near Minnesota USA involved using a zero coupon US Treasury bond as collateral.
At the time, interest rates were around 8% and a zero coupon bond maturing in 12 years cost about 35 redeeming at 100 at maturity. It was proposed that the bond was purchased by a bank that also provided the loan to build the plant. In effect, the 12 year loan to construct the plant would have been paid off at maturity by the redemption of the bond and the interest due was rolled up for the eighteen months it would take to build the plant and then paid out of the revenue from the sale of the ethanol. With the benefit of hindsight, if this scheme had gone ahead the venture would have been a great success since interest rates fell to today’s level and the zero coupon bond would have nearly paid off the loan.
Zero coupon bonds are the capital section of a standard Government Bond where the interest bearing part has been stripped out. Most developed countries allowed this this splitting of interest and capital to be carried out by government bond dealers. This practice was first authorised and adopted in the mid 1980’s and many bonds were ‘stripped’ to meet the specific requirements of pension funds and financial institutions.
Unfortunately, at the time this ethanol project was looking for funding, the 1990/92 recession arrived rather unexpectedly and banks went from lending adventurously to not lending at all. Consequently, the ethanol project did not succeed in raising the funds although there was interest from a few banks in Minnesota initially. The potential lenders did find the zero coupon bond concept very innovative. To counter the recession, central banks reduced interest rates to the low levels we see today and the concept of using a zero coupon bonds does not work as a means of collateral in the current financial environment.
This led the team at BEA to look at devising other new methods that might be appropriate to provide project finance. Over the next few years The Collateral Guarantee System (CGS) was devised and prepared as a paper and presented to various UK institutions known to BEA. The initial reception was not overwhelming mainly because the recession was still affecting the financial community and new innovative concepts were not being considered while banks particularly were still recapitalising and project finance was and still is a specialised activity.
Various attempts were made to promote the concept but the detail and understanding of the concept tended to be misinterpreted. Over the years the CGS has been refined and reapplied to various project financing ideals without finding the natural partner or promoter to make it happen, However, commentators, financial experts and the EU Commission have responded enthusiastically to the fundamental theory and Jean-Claude Juncker used the framework for the CGS project finance plan that is now referred to as the’ Juncker Plan’ to boost funding for projects in the EU. They did acknowledge receipt of the proposal when it was originally presented but did not seek any contribution from BEA.
While the CGS was being promoted it became clear that something similar was needed for small and medium sized enterprises (SME’s) which went through severe funding problems when the ‘dot com bubble’ burst in 2001/2 and latterly after the financial crisis of 2007/8. This was much closer to the original purpose of BEA and the concept of Enterprise Managers was devised to provide a permanent mechanism for SME’s to be able to obtain funding and most importantly the advice and support that they desperately need to develop their businesses.
The principle of the plan was based around the CGS and adapted specifically for SME’s. During the time BEA Innovative Finance has been devising schemes to look at different ways of financing projects and SME’s, these two main themes have been the basic formats for a range of proposals that have been put forward to the UK Treasury, Business Departments in their various guises and financial institutions. This is still going on and hopefully there will be a proper reaction to the concepts that do provide a real solution to the funding requirements for infrastructure, commercial projects and SME’s. Below these two main themes are described in detail.